Taxes pay for roads, schools, firefighters, Coast Guard rescues and a thousand other goods and services we need for our society to function.

But taxes also shape our incentives. We tax things that we deem to be harmful — like tobacco and alcohol — and hand out tax breaks to encourage things we find beneficial, like research.

According to a new white paper by Nobel Prize-winning economist Joseph E. Stiglitz, our labyrinthine tax system is skewing those incentives. We’re encouraging corporations to invest in creating jobs overseas, when unemployment remains doggedly high here at home. We’re giving US-based multinationals good reason t0 deprive our treasury of revenues when we should be investing in infrastructure and the American people.

The report, prepared for the Roosevelt Institute, offers seven concrete proposals for reforming our corporate tax system so it aligns with the greater good. We have excerpted these below. The full recommendations are available in Stiglitz’s report, Reforming Taxation to Promote Growth and Equity(PDF).

1. Raise Corporate Income Tax Rates While Providing Incentives for Investments and Job Creation in the US

The implicit assumptions of the advocates of lower corporate tax rates are that low rates induce more investment and that high corporate tax rates disincentivize investment. Both theory and evidence indicate that low corporate tax rates fail to induce investment, but that one can design a corporate income tax that will promote investment and employment creation in the US. Such a tax system will require higher tax rates on corporations that do not invest, accompanied by lower taxes on those that do. It is the difference in taxation between those who do and those who do not invest and create jobs that provides the incentives for investment and job creation.

2. Reduce Spending on Corporate Welfare

Welfare payments provide assistance to poor individuals in need. But in the US, we give large amounts of money to rich corporations that can hardly be viewed as needy. Such payments — mainly hidden in our corporate tax system — have come to be called corporate welfare.

Corporate welfare consists of the billions — over a decade, tens and perhaps hundreds of billions — of dollars to enrich the coffers of corporations, sometimes to protect them from adverse situations (as in the massive bailout of the banking system, sometimes directly, as in the current crisis, sometimes indirectly, through the IMF) and other times to “promote” particular industries. The net beneficiaries of corporate welfare are, by and large, wealthy Americans — and increasingly wealthy foreigners (since foreigners are large owners of American corporations) … Both for reasons of equity and efficiency, the elimination — or at least the reduction — of corporate welfare should be at the center of tax reform.

3. Tax the Financial Sector

There are good reasons why there should be a special set of taxes imposed on the financial sector. First, the recession caused by the misdeeds of the financial sector is a major cause of the current high level of national indebtedness. Secondly, there is an important role for “corrective” taxation — taxes that simultaneously raise revenue and provide incentives for firms not to, for instance, impose externalities on others. The financial sector has, in fact, imposed huge costs on the rest of the economy.

But in spite of the evidence that it has imposed large costs on the rest of the economy, the financial sector has been particularly successful in escaping taxation. We suggest a number of financial sector taxes that would, we believe, actually increase the likelihood that the financial sector more efficiently performs the key social functions that it should perform.

4. Tax on Monopolies and Other Rent-Based Enterprises

One of the advantages of taxing monopolies and other rent-based enterprise “profits” at a higher (“surtax”) level is the absence of adverse supply responses. Indeed, if the response to taxing rent seeking activities is to decrease the quantity of such activities, the efficiency of the economy may actually be enhanced. While in some cases it may be difficult to ascertain the extent to which there are monopoly profits, in some sectors (such as telecom and cable TV) the magnitudes and associated distortions are large.

5. Ensure that Multinationals Pay Their Fair Share of Taxes and Have Incentives to Invest in America

In the current system, we lose not just tax revenues but also jobs. In the following two subsections, we discuss two ways by which this problem can be addressed.

Tax firms on their global income in a fair and comprehensive way:In spite of the recent assertions of the Supreme Court, corporations are not people. One of the ways that they differ from people is that where they reside can be nothing but a legal fiction. We can tell where an individual resides – an individual is a resident of the State of New York if she sleeps 50 percent of nights in New York. But a corporation can set up an office in the Cayman Islands, claim that as its home, even if little or none of its business is conducted there, and even if it has few if any employees there. Our leading technology companies have shown that they can be as innovative in tax avoidance as they have been in producing new products. The current system cannot work in a world of globalization.

Tax Intellectual Property:Corporations whose profits are strongly related to intellectual property have been particularly effective in tax avoidance, partly because it is relatively easy to claim that the intellectual property was created in, or resides in, a low tax jurisdiction. This is so even when the intellectual property depends heavily on basic research paid for by American taxpayers. As we noted earlier, technology firms, whose very existence depends on the Internet, which itself only exists as a result of government investments in research and development, have become emblematic of this kind of “corporate irresponsibility.”

6. Increase Taxes on Industries That Produce Negative Externalities

Taxes on industries that impose costs on the rest of society actually increase economic efficiency. It is better to tax bad things (such as pollution) than good things (such as work). The market produces too much of some things (such as toxic mortgages and toxic waste) and too little of others (such as basic research).

Taxes can be particularly effective in curbing these negative externalities, and in doing so, yield double dividends. The most important category of corrective taxes are those on environmental externalities, and within this area, the most important are those associated with carbon emissions, with their impact on global climate change.

It matters less whether those generating the pollution pay a carbon tax or buy emission permits that are auctioned. Either can generate large amounts of money and simultaneously improve economic performance.

One of the distortions associated with the current tax regime is that it encourages excessive leverage, which can, in turn, contribute to excessive volatility. Firms that raise capital through debt can deduct the interest they pay, but this is not true for the dividends that firms pay to those who contribute equity. This bias would be eliminated if dividends were tax deductible. But many of the recipients of the dividends would, under the current regime, then succeed in avoiding all taxes on this income, by taking advantage of various provisions in the tax code. Hence we propose that there be a 40 percent withholding tax. Upper-income Americans who actually pay taxes on dividends received would then get a full credit for these taxes that have been withheld. There would then be no double taxation — there would be an effective integration of the individual and corporate income tax.

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7 Takeaways redux: I’m counting “6 takeaways”, since #4 & #6 are the same. That aside, they highlight a sound approach to getting business methods refocused on innovation and product. Corporate welfare should aid progressive improvement, not become an industry in its own right.

Anonymous

Tax at a lower rate, utilities that are trying to be competitive with monopolies. Add firearms, guns and bullets, to the things that are dangerous like tobacco. Deny “intellectual property” to GMOs. They are only designed to take a pounding from Round Up and have no societal value like increased nutrition, abundance, or quality. Give healthy tax credit to alternative energy and prevent states from taxing clean energy sources like solar and wind, no matter how Big Oil pushes this Also tax cars that use more gasoline at a higher rate than more efficient models. Preventing wars for corporate profit would be the greatest help in restoring Domestic Prosperity.

Anonymous

Wow. I really like this. Rather than permit corporations and wealthy individuals to remove money from the supply, these kinds of policies will much better keep it in the economy where it works, producing wealth across the economy through the multiplier effect. That money cannot work for the nation in hidden bank accounts and other tax dodges. Trickle down is backward. We are a consumer economy. Demand is the source of wealth. Businesses chase those dollars in an accurately described competitive capital system. The last thing they want is competition, and that sector has so gamed the country that social conditions are in decline.

Anonymous

Some ideas are not without merit – especially around monopolies and corporate welfare, but the rest will just add yet more layers and confusion (and hence loopholes).

Tax needs to be simpler. Much simpler. One rate on all “income” regardless of where it comes from (wage/salary income, dividends, capital gains taken, benefits in kind). Only tax business entities (whether registered companies, individuals or partnerships) on money leaving the business (as dividends, cash take out or benefits in kind for individuals/partnerships). Give tax authorities the power to rewrite accounts into a standard form to prevent money being “leaked” by things like differential transfer pricing or agency sales agreements then tax all genuine income in territory.

Then if you want to provide incentive for doing or not doing something do it with separate explicit subsidy payments or levies but don’t mangle the whole tax code in the process

Anonymous

I see a lot of Henry George in this. Through a modern lens, we must better value the community’s shared stake in natural resources that preceded our species and will regenerate without us, if we don’t interfere. That encourages stewardship. Individual labor to create value can be owned, with respect and fair compensation given to all of the labor surrounding that owner. Speculation and rent-based profits should be taxed as “peculiar” (to use Adam Smith’s word) and not derived directly through labor.

runnadaroad

Has anyone else noticed that # 4 & # 6 are identical?

Don

Another business tax that discourages US job creation is the business payroll tax. Big corporations avoid this huge tax by firing US workers and hiring overseas. This destructive tax should be abolished and replaced by a tax proportional to a business’s gross domestic receipts (such as a Value Added Tax) so that foreign & US businesses are taxed on an equal basis.

Yes, prices on foreign-made goods would increase (without hindering free trade), but that is only fair because prices on US goods already reflect this huge, destructive business payroll tax. This reform could be structured to obtain more money for Social Security and Medicare while reducing overall costs for US businesses – a win-win situation. It would be nice to hear Joseph E. Stiglitz’s opinion on this.

JonThomas

Good catch.

JD LAM

Number seven is, “Reduce the bias towards leverage by making dividend payments tax deductible, but imposing a withholding tax.”

Anonymous

Hong Kong to Corporations: Incorporate over here, we have low tax rates only for your local income, and zero rate for your overseas income.

Stiglitz to Corporations: We will raise your taxes if you are a US corporation, and we will tax your worldwide income at high rates.

Stiglitz and Bill Moyers don’t get it. It is a global economy and global market place. If Michigan and New York raise taxes, corporations move to Texas. If the US raises taxes, corporations will move abroad.

The US used to be 50% of the world economy, but it is now only 20% and declining. Lots of countries would love to have Apple and Google and GE and Exon move operations and incorporate there.

The US can antagonize corporations, raise taxes, threatened to jail CEOs, what have you – but I’ll guarantee you – you will not like the results.

Antagonize the 1% at your own risk.

John G.

I hope you got paid for this coward.

Anonymous

America became the economic powerhouse of the world when we taxed rich individuals at 90 percent on their top marginal dollars — under Eisenhower and Kennedy — because it provided an incentive to keep profits within the businesses to invest and grow rather than bleed corporations for personal executive incomes. Alongside that, government spending on such things as the space program provided the seed bed for innovation and productivity that propelled the US economy.

This is the other side of the coin. We need all of this if we are to return to a nation with a healthy middle class.

Ron Ein

They may set up shop overseas, but they want the protection of the US flag–the US military–so they will not completely abandon our shores. Another possibility is if they do choose to leave. That creates space for new companies to provide the services abandoned by those global dinosaurs.

Anonymous

I think you are mistaking the country of incorporation with the country of operations.

A global company like say Apple or Exxon or GE, needs flag protection for its operations, not for its papers of incorporation.

An example of that is the shipping industry. Must merchant and cruise ships fly flags of convenience – which are all about taxation and other items. The US navy would, of course, protect a US crew even when it is sailing in a vessel flying a Liberian or Greek flag – as in the case of Captain Philips.

Yes, there are certain advantages to being incorporated in the US, but those advantages are diminishing over time.

If the US attempted to levy a tax on the $2T of cash sitting overseas in American corporations accounts, you can bet that there will be an overnight industry created to re-incorporate overseas.

The US law trying to tax the income of US corporations generated overseas, is the single largest reason for exporting operations and jobs to other countries.

You see people protesting NAFTA and TPP, but the impact of the US global taxation laws dwarfs all these as the reason to move operations overseas.

For example, IBM can pay for R&D in India, with untaxed money that is in its offshore account. In order to pay for that R&D in the US, they’d have to bring that money in and lose 35% to the government. Result? IBM moves more and more operations overseas.

HopeWFaith

We cannot continue down the path we’ve been forced upon by the Republican regime, the Bushes, the Reagans, the blue dog Dems like Bill C. We understand that Clinton was swayed by the Republicans to sign off on their “doctrine”, their stripping of regulations on Wall Street, their trade agreement, but we must lay the blame on the President who went along with the Republican push. Let all future Presidents understand that the People will hold them accountable, that history will tell the full truth, and that all Presidents must provide ethical, honorable leadership, even in spite of threats, badgering, bullying from the opposition. They simply must hold the line, not be swayed to do wrong to the Nation, the People. Stiglitz is just one among several who’ve advocated for ethical taxation, ethical rules, logical policies. Why does our entire working class and poor have to be bent down upon their knees in order for the world to take note? That is the question. Why is so much pain needed before honorable men and women’s words about the truth, will be taken seriously? Why must they be so persistent, in order to be heard? Dems in Congress who cave in, must stop this practice. Do No Harm!

Merry C. Carey

Have you not noticed that 4 and 6 are the same so there are only 6 key points?

Eric Bowles

Lowering tax rates decreases the value of loopholes and deductions. Raising tax rates increases the value of loopholes and deductions to favor what lobbyists can exempt. Big companies and wealthy individuals don’t pay statutory rates – they find ways to exploit or create ways to avoid taxes. The higher the rates, the more value there is in paying a little more to avoid taxes. Reduce rates with minimal deductions and the money goes to investment, hiring, dividends, or salaries.

Anonymous

America reached its height of wealth and productivity from FDR to Reagan as a result of the full range of social/economic policies and programs that we put into place. We then began to reverse course, for the principle of it. From Reagan’s deregulation mania to Clinton’s welfare repeal, we are simply seeing the inevitable consequences.

Eric Van Bezooijen

I’d say the fact that every advanced industrial economy except the USA was a bombed out shell had something to with it as well.

Anonymous

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Robert H Warren

It appears that this article has been edited to remove the repetition in Points #4 and #6 without any explanation for the change. The change is welcome, but the sleight of hand in editing is questionable. Regarding #4: wouldn’t taxing monopolies tend to legitimize the practice and work against current antitrust law? The “If” in #4,(reduction of rent-seeking activities through additional taxation) is a big one- is there an example of this working anywhere in the literature? Regarding #6: can a negative tax system truly offset the harm -economic and ecological- caused throughout the system? The carbon swaps previously proposed left so much to be desired that opposition was never overcome. Are there mechanisms being considered to prevent the purchasers from passing along the added costs to consumers in order to offset the bite out of current profits? These questions notwithstanding, the “Stiglitz Solution” merits thoughtful consideration and effort toward implementation. As law, assuming it doesn’t get tied down with lilliputian industry riders and loopholes as did Dodd-Franks, it might one day exceed the stature of Theodore Roosevelt’s antitrust accomplishments.

jmacligget

Oh how I wish this was so, but most of times the money saved goew into the pocket of Board of Directors and owners( yes some of those are us investors), but most of the jobs created (i’m talking percentage) goes for low paying jobs or companies that use the 32+ hour no benefit option to even save more money (benefits and perks). Why dont we give huge tax incentives for companies providing education for employees and health care for all employees. Then it is a WIN WIN for both company and employee. Nuff said!

Peter Veasey

This issue is that how do you change a tax code when the politician are in the pocket of the Corporations. Just look at the contribution given to politician campaign funds and your asking the politician to shoot himself in the foot. Until lobbying is reformed in Washington nothing will change. On paper it might say for the people by the people, but in the bank accounts it by the money for the money.

Ballona Planter

Revolutionary, Carol! yet his is the only thing that would work, be morally JUST, (a true flat tax- not Dick Armey’s!); the same rate on everybody’s GROSS, NOT NET! (this incentivizes Efficiency instead of Fraud in the current system) EVERYTIME A DOLLAR MOVES IN AMERICA, no matter who’s hand it’s in, tax is Collected! Afterward, how services paid-for by taxes are Dispersed is completely separate. No favoritism to right/ left/ individual/ corporate/ homeless/ high-class… (tax tables start at $1, Social Security has no “cap”, no more Non-profits (political operatives learned how to work ‘em))… no sheltering/ tax credit for anything: having children/ corporate investment/ 1st-time homebuyers/ etc. Tax form for you, or GE, is 1 page long: how much $ did you make in America last year from all sources? x tax rate (15%*) = tax you pay. * %-age would be calculated from GDP. Thousands of tax attorneys & preparers laid off! Stigltiz’s gonna hate it, along with corporations/ wealthy people who run the game (buy legislators to write the rules: tax code/ loopholes/ incentives so they pay nothing).

Anonymous

We need to change our campaign finance laws. The recent decisions by SCOTUS on Citizens United and McCutcheon are rightwing abominations. We also need to fight voter discrimination; the Brennan Center for Justice has been doing an excellent job fighting rightwing attempts to disenfranchise voters. The most important thing, however, is for people to stop voting against their own best interests and I do mean people who vote for liberal gun laws while the First Amendment is exploding around their ears and they’re not even paying attention.

Anonymous

“Let all future Presidents understand that the People will hold them accountable…”

Therein lies the problem. The People have not held presidents or Congress accountable. Instead, the People continue to vote for the crooks who created this mess or worse, crooks who want to push the mess into the extreme.

yon

Valid points with 1 obviously flaw. The more US multi-nationals siphon their interests abroad, the less US citizens at a lower pay with less jobs will have to buy their goods or services. They are essentially diluting there own profits, it’s un-sustainable, considering they are NOT paying foreign countries’ workers the same that are not able to afford their goods the same as a US worker – thereby limiting the amount of profit they will be making in the future. Short-sighted and self-serving CEOs cutting off their noses to spite their face.

WaukeshaGuy

Currently, we will not be able to change our tax laws, much less our campaign finance laws, or even our free communication laws (FCC reforms from 1996). Neither the Democrats nor the Republicans see any benefit to them for us to cut off their flow of “pay for play” money from the top 1%. It is going to need a full grass roots effort from an unpleasant alliance of both whites and non-whites, alliance of both Middle-Class taxpayers and “the bottom 47% that does not pay taxes”. Only then can the laws be changed.

It will never be to say “vote Republican” or “vote Democrat”, it is going to have to be “write-in this candidate” in the general election. The top 1% that own the media channels will not let any of these pro bottom-99% get any air time for campaigning, and the social media internet sites will be censored by their top 1% handlers from allowing these people to organize and select the write-in candidates to write in.

So, does it mean go to war with your bottom 99% other-class neighbor over it? No. We need to find a better way. Need lots of forward thinkers (“forward” is straight ahead, “forward” is only “to the right” when on paper, not in real life). Need forward thinkers to craft a plan that will work for all of us, despite that we have a global economy with differences in out-sourced labor costs and rampant illicit capital flight of corporate and private money to foreign tax havens.

Craig T. Shoemaker

The points Stiglitz makes are reasonable. However, for those of us who are seniors and have been investing, hopefully wisely, #7 might need to be reworked. If we have invested money that we already paid taxes upon I.e. Federal, state and local would not 40% withholding be double taxation. Or would that be a tax credit, thus making it tax neutral to the individual but taxable to the corporations?

pointofgrille

We allow ourselves to be manipulated and divided over emotionally charged single issue differences (Abortion, gun rights, race, poverty, welfare, etc.) that are created and continually fueled by the Oligarchical Wannabe Rulers. We must begin maturing as a society, and recognize how these manipulative forces prevent us from electing truly representative legislative bodies. That is the mechanism that continues rampant ‘voting against our own best interests’ on election day. The voting behaviors of all blocks of society are well measured by our instant tabulating of current data and the moneyed interests can easily identify what arguments they need to fuel in a particular precinct or region to get their desired outcome. While, We the People, continue to argue among ourselves over closely held, emotionally charged issues, the power brokers target their $$$ to either attract particular voters to the polls or discourage a targeted group of voters, so they decide not to vote. These single issue difference, that so many of us hold passionate views about are a tool used by the power brokers to keep the voters away from the important issue of electing people who represent the best interests of all voters. The puppet masters can and do control the flow of voters to the polls to suit the wants and desires of the Wannabe Rulers. It is up to US to stop allowing these divisions to keep us divided.

Death Spiral

You mean the market that’s not creating jobs with a living wage?

Patrick T. Hendrick

You are not taxed on the initial investment that was taxed. The tax is on the income generated. Previously it was called unearned income in the tax code.

Larry Holman

Why not simply nationalize some of these industries, especially those that were bailed out by taxpayers and that have been heavily subsidized by government?

domsooch

imbecile

domsooch

yes it would be disastrous for investors, though I don’t think this short-sighted crowd would care very much.

moderator

To the community,

If you personally attack other members of the community, you will be unable to post again.

Moderator

Gear Mentation

As far as I can tell, where they would need to be nationalized, they should just be shut down, as they provide no value to the larger society. Where they do provide value, there’s no reason to nationalize them, just to regulate them properly. Banks should be required to be much like credit unions.